Data points to modest recovery, muted inflation

The economy is on a moderate growth path and inflation pressures are contained, data showed Thursday, backing up the Federal Reserve's vow to keep benchmark interest rates ultra-low for some time.

Initial claims for state unemployment benefits fell 5,000 to 457,000 last week, the U.S. Labor Department said, suggesting the jobs market was improving, but only gradually.

In another report, the department said the Consumer Price Index was unchanged in February after rising 0.2 percent the prior month. Excluding volatile energy and food prices, the closely watched core measure of consumer inflation inched up 0.1 percent after falling the same amount in January.

Even though we have growth in the economy, there is still spare capacity that is putting downward pressure on inflation. We think the Fed can be comfortably on hold, Zach Pandl, U.S. economist at Nomura Securities International in New York.

Citing a moderate economic recovery and low rates of resource utilization, the Fed -- the U.S. central bank -- this week renewed a promise to keep its benchmark interest rate exceptionally low for an extended period.

The economy resumed growth in the second half of 2009, led by the manufacturing sector as factories ramped up production to rebuild inventories that had been reduced to record low levels because of weak demand.

Manufacturing continues to expand and the Philadelphia Federal Reserve Bank said its business activity index rose to 18.9 in March from 17.6 in February, but new orders fell. A reading above zero indicates expansion in manufacturing.

The drop in orders and the smaller-than-expected drop in new applications for unemployment aid pulled U.S. stocks lower. Stocks were also held back amid disappointment over a tiny rise in domestic volumes handled by major package deliverer FedEx Corp in the three months to Feb 28.

FedEx is considered a bellwether of U.S. economic activity and the small gain in domestic volume suggested a slow recovery.

U.S. government debt prices fell after the Treasury said it would auction $118 billion worth of notes this month. The dollar rose against the euro.

SLOW LABOR MARKET HEALING

Analysts said the small decline in initial jobless claims last week was indicative of a labor market that was slowly healing and meant benchmark lending rates would in the current zero to 0.25 percent range for a while.

The claims data covered the survey period for the government's employment report for March, which will be released April 2. Analysts expect this key data to show job growth in March, led by temporary hiring for the 2010 census.

About 8.4 million jobs have been lost since the start of the recession in December 2007 and creating employment is critical to the economy's transition from a government-aided recovery to a self-sustained one.

President Barack Obama, who has made tackling unemployment a priority, signed into law a $17.6 billion jobs bill on Thursday and said jobs were in sight.

A consensus is forming that, partly because of the necessary -- and often unpopular -- measures we took over the past year, our economy is growing again and we may soon be adding jobs instead of losing them. The jobs bill I'm signing today is intended to help accelerate this process, he said.

Obama and his fellow Democrats fear that public discontent over jobs could cost the party its majority in the U.S. House of Representatives and Senate in the November elections.

While weekly claims have struggled to post huge declines after falling rapidly in the second half of 2009, other employment indicators suggest the labor market is stabilizing and support views of job growth in the near term.

The Philadelphia Fed's employment index in March rose to its highest since August 2007.

Labor market conditions are repairing only slowly. I would expect (March) payrolls to be up, somewhere in the range of a hundred (thousand) to maybe a hundred and twenty-five thousand, said Robert Dye, a senior economist at PNC Financial in Pittsburgh.

We need to see private sector hiring regaining momentum. It's my expectation that we will see ongoing gains in private sector hiring. That is going to be the acid test whether we get into a self-sustaining recovery or not.

Labor market weakness, low industrial capacity utilization and high vacancy rates for residential and office space are keeping inflation pressures in check. While falling energy costs put a lid on consumer prices last month, inflation is trending lower on an annual basis.

Over the past year, core inflation has risen just 1.3 percent. That marks a slowdown from January's 1.6 percent reading and is the lowest since February 2004.

Even though the economic recovery remains on course, there are signs of a slowdown in momentum.

The Conference Board's index of leading economic indicators -- a gauge of the U.S. economy's prospects -- edged up 0.1 percent in February after a 0.3 percent increase in January.